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  • The Competitive Causes and Consequences of Customer Satisfaction

    Selected Paper prepared for presentation at the American Agricultural Economics Association Annual Meeting, Providence, Rhode Island, July 24-27, 2005

    Daniel H. Simon Department of Applied Economics and Management

    Cornell University 354 Warren Hall Ithaca, NY 14853

    Phone: (607) 255-1626 Email: dhs29@cornell.edu

    Miguel I. Gmez

    Department of Applied Economics and Management Cornell University 149 Warren Hall Ithaca, NY 14853

    Phone: (607) 255-8472 E-mail: mig7@cornell.edu

    May, 2005

    Copyright 2005 by Daniel H. Simon and Miguel I. Gmez. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this

    copyright notice appears on such copies.

  • 2

    The Competitive Causes and Consequences of Customer Satisfaction

    ABSTRACT

    We conduct two studies to test three hypotheses: (1) Competition increases a firms customer

    satisfaction; (2) Rivals customer satisfaction increases a firms customer satisfaction; (3) Rivals

    customer satisfaction reduces a firms sales. First, we use store-level customer satisfaction data from a

    supermarket chain. Next, we consider a range of industries, using brand-level customer satisfaction

    ratings from the American Customer Satisfaction Index. Results from both studies provide support for the

    latter two hypotheses, while we only find support for the first hypothesis in the second study.

  • 3

    Satisfying customers is critical to a firms success. Firms that cannot satisfy their customers are

    likely to lose market share to rivals who offer better service and products at lower prices. Fornell (2001)

    posits that satisfied customers may be the most consequential of all economic assets; indeed, they may

    be proxies for all other economic assets combined (120). More broadly, customers are a key stakeholder

    group that affects the firms legitimacy and long-term survival (Post, Preston, & Sachs, 2002).

    Despite its strategic importance, the role of customers and their level of satisfaction has received

    little attention in the strategy literature. While researchers have examined the organizational determinants

    of customer satisfaction (Schneider, White, & Paul, 1998), there has been little attention to the role of

    competition (Liao & Chuang, 2004). Similarly, while researchers have found a positive relationship

    between a firms own customer satisfaction and its performance (Capon, Farley, & Hoeni, 1990), there

    has been little effort to examine the impact of rivals customer satisfaction. As a consequence, we know

    very little about how firms competitive interaction affects customer satisfaction and firm performance.

    Although strategy researchers have not directly examined the role of customer satisfaction, they

    have examined the link between competitive interaction and performance. In particular, researchers in the

    competitive dynamics area have examined the links between firms competitive actions (Chen, Smith, &

    Grimm, 1991; Chen & Miller, 1994), and between firms actions and performance (Ferrier, Smith, &

    Grimm, 1999; Young, Smith, & Grimm, 1996). We extend the competitive dynamics literature by

    developing theory concerning the extent to which rivals affect a firms customer satisfaction. In doing so,

    we examine the nature and consequences of the competitive dynamics among firms, which is a key

    objective of the strategic management field (Ketchen, Snow, & Hoover, 2004: 779).

    Thus, this paper contributes by developing and testing theory concerning the competitive

    antecedents and effects of customer satisfaction. More specifically, we develop and test three hypotheses:

    (1) The amount of competition that a firm faces positively affects its level of customer satisfaction; (2)

    Rivals customer satisfaction positively affects a firms customer satisfaction; (3) Rivals customer

    satisfaction negatively affects a firms sales.

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    We test these hypotheses in two separate studies. In Study One, we use store-level customer

    satisfaction data from a chain of grocery stores. These data are unique because they include customer

    satisfaction ratings for all grocery stores (stores owned by the focal firm and by its rivals) in a local area.

    They allow us to examine the links between competition and customer satisfaction in detail. In Study

    Two, we extend our analysis to a wide range of industries using brand-level customer ratings from the

    American Customer Satisfaction Index (ACSI). The ACSI measures customer satisfaction annually for

    more than 200 brands. While less detailed, these data allow us to generalize results from Study One.

    By linking competition with customer satisfaction, this study offers three main theoretical

    contributions. First, it extends the structure-conduct-performance (SCP) perspective to cover a broader set

    of firm behaviors. While previous research has linked industry structure with firms pricing behavior,

    little research has linked industry structure with the broader construct of customer satisfaction or with

    specific dimensions of customer satisfaction. Extending the SCP perspective to a firms customer

    satisfaction is important because customer satisfaction comprises a much larger set of activities than just

    pricing. We posit that a firms customer satisfaction is a function of three factors: product quality,

    customer service, and prices. By linking market structure and customer satisfaction, we substantially

    increase the scope of activities that are influenced by industry structure. Moreover, we empirically

    examine the effect of competition on overall customer satisfaction, and on each of the three components

    of customer satisfaction: quality service, and price. In this way, we can assess which aspects of customer

    satisfaction are most influenced by competition.

    Second, we extend the competitive dynamics perspective to the realm of customer satisfaction,

    linking customer satisfaction with competitive strategy. This paper is the first to examine the competitive

    dynamics among firms competing on various dimensions of customer satisfaction. We assess the extent to

    which firms respond to changes in rivals satisfaction, looking both at overall customer satisfaction, as

    well as the three key components of customer satisfaction: quality, service, and price. In doing so, we

    improve our understanding of how firms compete for customers. In addition, by focusing on the

    competitive dynamics of customer satisfaction, our paper emphasizes that customer satisfaction is not

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    only an outcome variable, but it is also a strategic weapon that firms can influence in the battle for

    competitive supremacy. This is important for strategy researchers, as it suggests that customer satisfaction

    may provide a useful proxy for certain kinds of firm behavior.

    Third, we posit that rival customer satisfaction affects firm sales directly and indirectly. While

    increases in rivals customer satisfaction are expected to reduce a firms sales, these increases in rival

    satisfaction may have an indirect positive effect on firm sales by influencing the firms own provision of

    customer satisfaction. Therefore, the overall effect of rivals customer satisfaction on a firms sales is

    ambiguous. By considering both the direct and indirect effects of rivals customer satisfaction, this study

    enhances our understanding of the competitive consequences of customer satisfaction.

    Beyond the theoretical contributions, this study also offers empirical contributions. In particular,

    nearly all studies linking competition and customer satisfaction have been conducted in the service sector.

    By examining the impact of competition on customer satisfaction in the grocery store business we test our

    hypotheses in a new setting. Moreover, by conducting a second study using a broad sample of consumer

    goods and services, we are able to examine the generalizability of the relationships between competition

    and customer satisfaction. In addition, this paper is the first to examine the links between competition and

    customer satisfaction by considering multiple dimensions of customer satisfaction. This yields a more

    detailed understanding of how competition affects customer satisfaction.

    The rest of the paper proceeds as follows. In the following section we explain how competition

    affects the provision of customer satisfaction and we describe how rivals customer satisfaction impacts a

    firms sales. We review extant theoretical and empirical research linking competition and customer

    satisfaction and we state our hypotheses. In the third section, we describe the data, methods, and results

    for Study One. We then do the same for Study Two. Finally, we discuss our findings, including

    limitations and future research opportunities.

    LITERATURE REVIEW AND HYPOTHESES

    The Impact of Competition on Customer Satisfaction

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    While a long literature in industrial organization (IO) economics has focused on the impact of

    competition, in the form of market structure, on prices, very few studies have examined how competition

    affects firms overall customer satisfaction or non-price dimensions of customer satisfaction. At the same

    time, research in strategy has examined the

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